$10M Consumer Products Company Gets Back on Track
The Problem:
When MidMarket Management Group was introduced to ownership/ management of this consumer products company, which formerly boasted annual revenues of over $10M per year, the situation was dire. A series of ill-advised investment and strategic decisions made by the owner/manager had left the business with a broken supply chain, losses of approximately $5M on $8M of revenue for the year, and a $5M equity deficit. The senior lender was out of formula, and had not seen financial statements or borrowing bases from the company in several months. At the same time, a major US retailer placed a purchase order for the client to provide $8M of product over the next year, at profitable pricing.
The MMMG Plan:
MMMG took action immediately:
- Communicated with all vendors that the company would not be paying antecedent debts for the foreseeable future, and that all purchases going forward would be on a COD basis.
- Created a projected business plan, based primarily on just the new customer contract, including: P&L, Balance Sheet, and Cash Flow.
- Identified a buyer for the existing senior debt at 30% of the face value of the note.
- Convinced the senior lender that 30% was a better result than a liquidation.
- Found a Factor to lend against the new customer’s Accounts Receivable.
- Had the opening order (stocking order) shipped directly to the retailer’s distribution centers.
The MMMG Outcome:
Within two years, the historic Accounts Payable balance was negotiated to pennies on the dollar (nearly zero liability), and the business refinanced with a traditional lender. As a result of this refinancing, both the Factor and the original banknote, received full payouts (full face-value including interest/fees). The company continues to operate profitably to date.
High Tech In Transition
The Problem:
A technology company was caught in the middle of declining sales with older products, and not sufficiently capitalized to transition to a new product that held great promise. The company was out of formula, and losing money, and heading to the bank’s troubled loan area on a fast track. Further complicating the issue, was that this financial trouble was occurring in a time of severe economic duress, and a refinance was not available. As a backdrop to this account, it was well known that the company was owned by a very independent individual who was convinced that his way was the only way. It was very clear that there was no consensual path between the company and the bank going forward. Also, this individual was a well-known businessman in the local community, and there was concern that a contentious workout would damage the bank’s calling effort in that area.
The MMMG Plan:
We put a plan in place where the Line Officer worked on a consulting basis with a MMMG advisor who coached the Line Officer in addressing how to manage the troubled borrower. The MMMG advisor:
- Attended all of the borrower meetings
- Reviewed all materials provided by the company
- Developed the remediation plan which helped stabilize the cash needs of the company
- Evaluated valuable as yet unpledged collateral in the form of intellectual property determining that the bank would be well secured in a liquidation
- Supervised all of the enhanced documentation and additional collateral taken, to improve the bank’s position, and allow a turnaround to take place
- Provided a level of support internally convincing the credit approvers that the plan proposed would be a better result than a forced liquidation
- Most importantly, was instrumental in convincing the owner of the company that this was the best pathway forward
The MMMG Outcome:
In a few short months, the company was at break-even, and three months later, had raised additional equity to pay out the lender and fund new product development. The company ultimately developed the new products and was bought by its largest customer. The net result of this engagement was that the lender was paid in full, and the owner realized a healthy profit when the company was sold. This was a good example of the line leveraging skills and experience of a workout person to obtain a good result for the bank, and the owner without collateral damage in their marketing effort.
The Technology Company Turn Around
The Problem:
This publicly traded technology company had enjoyed rapid growth for several years, until the state of the technology had moved forward too rapidly for their inadequate capital structure to support both growth, and technological innovation. The company had weak cash flow, a tangible net worth deficit, a year of significant losses, and had lost position in the marketplace. In addition, their assets collateralized bank debt with total liquidation was valued at 25% of the loan.
The MMMG Plan:
Over the course of three months, we helped the company to identify and implement the following:
- Created a weekly cash plan that included the timely payment of vendors based on a reduced purchasing requirement. This plan included a projected Line of Credit usage, and availability that confirmed compliance with the bank’s metrics. The cash plan included significant changes in staffing and production to maintain operations at the lowest cost.
- Although the company did not have a line of credit, we introduced a good/bad bifurcation of the term loan to protect the company and the bank’s collateral.
- A forbearance agreement (the first of eight over two years) allowed the company to use cash and to continue in business in a much-reduced manner.
- Using the cash plan, each vendor received a vendor payment plan that would be acceptable to both parties, keeping the supply chain open.
- These weekly plans were the basis for all financial projections and forbearance agreements (7).
- Assembled a rolling liquidation analysis that confirmed to the lender that the continued survival of the business provided the best result for all.
The MMMG Outcome:
Two years after MMMG became involved, the company refinanced with a convertible debt facility that paid the bank off in full. The lender continued to hold warrants (awarded in two of the forbearance agreements) in the business after the refinancing. These warrants were, at one point, valued at $2.5M (more than the original total collateral value of the business when MMMG was introduced).
From Highly-Leveraged to Zero Debt
The Problem:
The current owner, although an outstanding manager and salesperson, had overpaid for this Industrial Products Company a few years prior, incurring massive debt. The company had suffered significant year-end losses during the previous year. It was now first quarter (known to be a period of loss of income every year), and the annual principal payment to the seller was due at the beginning of the second quarter.
The MMMG Plan:
MMMG took action immediately:
- Created a cash plan that included the timely payment of vendors based on a reduced purchasing requirement. This plan included a projected Line of Credit usage and availability that confirmed compliance with the bank’s metrics.
- Using the cash plan, each vendor received a vendor payment plan that would be acceptable to both parties, keeping the supply chain open.
- Rescheduled production and labor to reduce severely bloated finished goods inventories.
- Implemented a sub-assembly manufacturing strategy that over a year, reduced inventories by over 25%.
- Selling several assets that the company owned that did not have value to the operating business.
- Negotiated the bank’s agreement to waive the trailing twelve-month covenant defaults, and allow for the payment of the seller note.
The MMMG Outcome:
Within two years, the company was able to refinance all of its debts into a single note with much lower debt service requirements. Today, the company continues to operate profitably and has no bank debt at all.